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This is a ten question multiple-choice quiz covering the material in this Unit. I hope you do well!

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Question 1 of 10

1. Question

10 points

The inflation index that measures price changes of consumer goods and services is called the _____. The inflation index that measures prices changes of producer goods and services is called the _____. A measure of price changes of final goods and services using nominal and real GDP data is called the _____.

2. Question

10 points

Section 1 of this unit mentions several problems with inflation measures. Which of the following is not a problem mentioned in our text?

Some products are produced in other countries and then imported in this country. Inflation measures include these foreign products whereas they should officially be excluded because they are not part of our GDP.

New goods and services are produced each year. It is impossible to measure a price change of a product that didn't exist years ago.

The quality of products changes over time. It is difficult to compare prices of products when the products are very different from what they were years ago.

People change their consumption habits. Some people may choose to not buy a product anymore, or not buy as much of a product. This could overstate the inflation rate if the product is still included to the same extent as when people were buying a lot of the product.

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Question 3 of 10

3. Question

10 points

According to our text, what is the only long term cause of rising prices?

An increase in the money supply that exceeds an increase in amount of products produced that year (ceteris paribus).

An increase in government spending, especially if this is financed by higher taxes.

Business monopolies and price gouging by businesses looking to make profits that are more than what can reasonably be expected.

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Question 4 of 10

4. Question

10 points

When a government prints excessive amounts of additional money and the circulation of money (velocity) accelerates to unusual levels, the country experiences:

hyperinflation

hyperexpansion

virtual asset implosion

crowding out

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Question 5 of 10

5. Question

10 points

Section 3 lists six harmful effects of inflation. All of the following are listed and described, except:

Inflation causes budget deficits.

Inflation encourages people to invest more in existing assets and less in new and productive assets (mal-investments).

Inflation discourages savings.

Inflation causes people to pay higher tax rates if tax brackets are not fully indexed.

Rising inflation causes increases in interest rates.

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Question 6 of 10

6. Question

10 points

According to our text, if a government keeps its money supply constant, and productivity and production increase, then:

Average prices of goods and services will fall.

long-term unemployment will increase.

Average prices of goods and services will rise.

Business profits will eventually fall and employment will stagnate.

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Question 7 of 10

7. Question

10 points

According to our text, a big misconception exists about falling prices and their effects on economic growth and employment. Many economists and politicians believe that falling prices are harmful because:

All of the listed answers explain why the misconception exists among economists and politicians.

falling prices usually occur during periods of declining real GDP. The drop in aggregate demand makes prices fall. Therefore they associate falling prices with a poor economy. (what they don't realize though is that a declining GDP causes falling prices and not the other way around - fallacy of cause and effect).

falling prices cause business profits to decline. (what they don't realize though is that if falling prices are caused by increases in productivity, businesses will experience lower costs and they therefore can afford to lower their prices and still make sufficient profits).

falling prices in the housing market makes people buy fewer houses and therefore slows down the economy (what they don't realize though is that if we have a consistently constant money supply and therefore consistently falling prices, then we will not experience a decrease in the demand for houses).

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Question 8 of 10

8. Question

10 points

According to our text, in an economy with consistently falling prices, banks must make sure that when they issue mortgage loans (loans to finance houses), they:

should follow all of the suggestions listed in the three other choices.

should structure the monthly mortgage payments such that the loan amount (principal) decreases each month.

should make responsible loans to responsible borrowers.

Should require home buyers to use some of their own money (for example, 10%) to buy the house. The bank will then finance the remainder portion.

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Question 9 of 10

9. Question

10 points

According to our text, all of the following are correct, except:

Falling prices make people buy fewer houses because the worth of their houses declines as the price of the house declines.

Falling prices especially help the poor because the poor usually spend their entire income on goods and services and price decreases will help their budget.

If a country has a minimum wage, falling prices will increase the real value of the minimum wage each year.

falling prices caused by a constant money supply and increases in productivity and production may keep nominal incomes the same, but result in increases in real incomes.

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Question 10 of 10

10. Question

10 points

Countries that were on the Gold Standard required their central banks to increase the nation’s money supply by only as much as the country’s supply of gold. Because the supply of gold typically increases only by 1 or 2%, it forced central banks to limit their money supply increases by only 1 or 2%. A limited increase in the money supply creates more price stability. In the late 1960s/early 1970s most countries banned the Gold Standard because:

central banks wanted the power to increase the money supply by more than 1 or 2% in order to stimulate the economy in times of recessions (Keynesian theory).

there was a sudden increase of world gold supply of close to 20%.

economists discovered that there was no relationship between increases in the money supply and average price levels.